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Investment Overview for AT&T (NYSE:T)

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Below are key drivers of AT&T's value that present opportunities for upside or downside to the current Trefis price estimate for AT&T.

Business Solutions

Strategic Services Revenues: AT&T's strategic services business unit - which consists of several specialized business communications and IT products such as VPN, cloud, integrated communication and security - is perceived to be a high growth area for the company. We estimate that revenues for this division will rise from around $12 billion in 2016 to about $16 billion in 2023. However, if the division is able to outperform, on account of AT&T's strong business relationships and broad product portfolio, with revenue rising to about $22 billion by 2022, there could be an upside of roughly 5% to our price estimate.

Business solutions postpaid wireless market share: We expect the metric to remain relatively stable over the long-term, amid saturation in the wireless market and AT&T's focus on primarily retaining high-value smartphone users at the expense of its feature phone user base. However, if AT&T is able to grow its share by 1% by 2023, there could be an upside of about 5% to our price estimate.

Consumer Mobility

U.S. Mobile Phones in Use: We estimate that this figure will increase from about 315 million in 2015 to around 345 million by the end of our forecast period, as the U.S. mobile industry gets saturated and growth slows down. However, if the growth rate remains high and the figure reaches 400 million, there could be an upside of about 10% to our price estimate.

Average Revenue Per Postpaid Subscriber: We estimate that this figure will rise from around $58 in 2016 to about $65 by 2023 as more people upgrade to smartphones and subscribe to higher priced plans (such as AT&T's new Unlimited offerings) . However, there could be a downside of over 5% to our price estimate if this figure remains flat through our forecast period.

For additional details, select a driver above or select a division from the interactive Trefis split for AT&T at the top of the page.

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AT&T makes money primarily through mobile phone subscription plans for consumers and businesses. The company also provides landline phone service to residences, small businesses, and large enterprises. Broadband Internet service represents a growth area for AT&T. AT&T acquired satellite TV provider DirecTV in mid-2015, making it the largest pay-TV company in the United States. In 2016, the company announced that it would be acquiring media behemoth Time Warner in a deal that could close by the end of 2017.

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AT&T's mobility services units account for a majority of AT&T's value for these two reasons:

AT&T's large share of the U.S. wireless phone market

As of December 31, 2016, AT&T served over 130 million wireless subscribers, including phones and connected devices. Mobility services account for more than 50% of AT&T's revenues.

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Carriers have essentially become mobile data providers

Mobile data usage has skyrocketed in the last few years due to the increasing proliferation of smartphones and the related applications and services. According to Cisco, North American mobile traffic per user will reach over 8 GB per month by 2020, up from roughly 1.8 GB per month in 2015, translating into a CAGR of 37%. Voice usage on the other hand is trending lower. According to the CTIA, aggregate monthly voice use in the U.S. fell from 218 billion minutes in 2013 to about 205 billion minutes in 2014. Carriers have also been tailoring their plans based on the monthly amount of data offered, while typically offering free unlimited voice and text.

Saturating wireless market

The U.S. wireless market is saturating, with the total number of wireless connections standing at over 355 million and the number of wireless phone subscribers standing at over 315 million, roughly in line with the U.S. population of 319 million.
It's likely that growth in the number of wireless phone connections - which represents the most lucrative segment of the wireless market - will slow significantly going forward. Carriers are likely to focus on retaining existing customers and winning over porting customers, while driving an incremental upside from areas such as connected devices and tablets, M2M connections and wholesale services to drive growth in service revenues. AT&T for its part has been focusing on postpaid smartphone customers as well as prepaid customers, while reducing its emphasis on postpaid feature phone users, who often have ARPUs lower than its prepaid ARPU. The carrier is also the largest player in the M2M and connected auto space in the U.S.

AT&T's content ambitions

In 2016, AT&T announced that it would acquire Time Warner in a stock and cash deal valued at $85.4 billion, integrating its vast distribution network, which spans wireless and broadband services and pay TV, with Time Warner’s media assets, which include the major cable networks CNN and HBO and Warner Bros Studios. With the deal, AT&T would own a significant amount of high-quality original content, besides gaining some bargaining leverage in acquiring content from other companies for distribution. The transaction, which is subject to approval from the U.S. Department of Justice, is expected to close before the end of 2017.

Acquisition of DirecTV Makes AT&T The Largest Pay TV Player

AT&T closed its acquisition of satellite television provider DirecTV in July 2015. The deal should enable AT&T to become a key player in the content distribution space, across various platforms including mobile, broadband and TV. AT&T will also gain rights to content such as the NFL Sunday Ticket, which is one of the hallmarks of DirecTV’s offerings. The merged company will be able to offer a “quadruple-play” bundle that includes mobile and fixed-line phone service, high-speed Internet and satellite TV. AT&T intends to launch three new streaming options dubbed DIRECTV Now, DIRECTV Preview and DIRECTV Mobile beginning in 4Q 2016.

Trefis Forecast Rationale for Print Yellowpages Revenues

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US consumers typically use Yellow Pages to look for information on products and services in their locality and neighborhood. In the last few years, consumers have started using online Yellow Pages--as well as local search engines (like Google's local search)--to look for this information.

Print Yellowpages revenues is the amount of revenue generated from advertisers looking for space on Yellowpages.

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Revenue from Print Yellowpages has declined substantially in the last few years as an increasing number of searches were performed online.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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